The World
Harvesting is underway in Europe and with favourable rainfall in most regions the production outlook suggests a good or very good harvest, according to the International Olive Council (IOC).
Consumption patterns seem to be normal.
Price movements are downwards or stable with total transactions well below expectation.
The expected rise in virgin olive prices which usually precedes the new harvest in Europe have not materialised and prices have continued to fall or levelled off. Compared to the same time in 2007, the prices for extra virgin olive oils are 1% lower in Spain, down 15% in Greece and down 15% in Italy.
Prices for refined olive oil were 4% lower in Spain, 2% lower in Italy and stable in Greece. (IOC)
These trends suggest an increased carryover of stocks in Europe and with an expected above average harvest, further downward pressure on prices.
The world economic situation, with the USA officially in recession and most of the major olive oil consuming countries in Europe also in recession, will affect retail sales which can be expected to fall, putting further downward pressure on prices.
The spectacular fall in the price of crude oil will ease the pressure to find alternate energy sources such as biofuel from vegetable oils. This should reduce the demand for canola and soya bean oils, making these oils cheaper. International commodity prices for grains and their vegetable oils will therefore follow the downward trend of the world financial markets. The expected lower prices of vegetable oils will flow through to supermarket shelves and foodservice, putting downward pressure on competing oils such as olive oils.
On the positive side, currency exchange rates have seen the rise in the US dollar which will favour imports into the country which has the highest olive oil imports outside the European Union (EU).
Australia and New Zealand
In the high volume bulk and supermarket olive oil trade, the rapid fall of the Australian dollar will tend to increase the cost of imported olive oils. This may be offset by the prices in the EU falling over the next year.
However, over the last year, with the exception of refined olive oil in bulk, import prices at the wharf have fallen. The average price (customs value) of packaged virgin olive oil imported into Australia in October was $5.26/kg (4.78/litre), down 2.5% on the same period last year. Bulk virgin olive oil averaged $4.66/kg (4.24/litre), down 10.4%, packaged olive oil averaged $5.12/kg (4.66/litre), down 5%. Against the trend, bulk olive oil increased by 16.5% to $4.80/kg (4.37/litre).
Consumption of olive oil may decline, especially if the prices do not fall to compete with the falling prices of other vegetable oils both in supermarkets, manufacturing and foodservice.
Supermarkets have already indicated a rationalisation of olive oil brands offered and the general trend in retail is to reduce inventory as consumer demand declines.
On the positive side, the falling Australian dollar will improve the potential for exports to the US and EU. This will be offset by increased stock in Europe competing for the US and EU markets.
In the current production cycle, shortage of water for irrigation will affect the yields in some of the largest groves in south eastern Australia. In Western Australia the cropping season is expected to be good, after the alternate bearing affected 2007 harvest and adequate rainfall.
A recent report in The Australian indicates that the large Managed Investment Scheme developments in the olive industry are over. Both Timbercorp and Great Southern Plantations, who have substantial investments in olive groves, are trading at less than 5% of their peak values in 2006, with more than $1.7billion stripped from their combined market capitalisation. Both companies are reportedly selling off assets, including olive groves, to reduce debt. The result will be a significant slowing of expansion in all aspects of the olive industry.
These factors lead to the price expectation for large volume Australian extra virgin olive oil being downward to compete with high international stocks of olive oil and low vegetable oil prices. The price for refined olive oil is expected to increase as most of it is imported and affected by the poor Australian dollar to Euro exchange rate.
Exporters should be aware that there have been reports of problems with International Letters of Credit (ILC) not being honoured as importers lack liquidity or believe they have paid too high a price as prices fall.
For the small volume and boutique market the outlook is one of increasing number of brands competing for a declining market with strong downward pressure on prices. While pre-Christmas spending appears to be equal to 2007 in boutique stores, the expectation is that there will be a marked slowing in early 2008 as more households come under financial pressure.
The food service and restaurant trade have reported fewer diners when Christmas festivities would be expected to boost covers. Corporate spending on festive season activities, and entertainment in general, has been severely curtailed. So olive oil consumption in the foodservice sector can also be expected to decline
The general outlook in Australia and New Zealand is for a tightening of the market resulting from declining local consumer demand and higher stocks in the EU. With a harvest which is expected to be higher than 2007, and lower competing vegetable oil prices, there will be downward pressure on prices without the compensating increase in volumes traded.
Production Costs
Producers will get a little relief from contracting margins with some expected decreases in production costs.
Over the next 6 months, all the inputs derived in some way from crude oil will start to cost less. These include fertilisers, pesticides, herbicides and other chemicals.
Fuel costs have already come down substantially so harvesting and transport in general should cost less.
Plastic and other petrochemical based packaging should also be cheaper.
Increased unemployment may lead to less costly labour. However, governments that have allowed seasonal labour migration may curtail this to increase the employment of local labour.
The lower commodity prices for iron ore should lower the cost of steel and other metals used in the manufacture of machinery. Add to this increased the competitiveness in all sectors, the cost of machinery and servicing can be expected to come down.
In Australia, with over 10 years of dry seasons, water will continue to be a major issue and prices will continue to trend upwards.In summary, expect lower prices, price competitively, maximise margins by increasing efficiency and promote, promote, promote.
Simon Field
Olive Business November 2008
www.olivebusiness.com
